Switching Government Inflation Measure Could Yield Big Savings

One proposal in the budget talks that is getting a serious look from all sides would switch the government’s way of measuring inflation and delivering a big impact on tax, spending, and entitlement programs.

How big? It could save roughly $300 billion over 10 years. That big.

The idea of using this different measure of inflation, known as a “chained” consumer price index, has won support from numerous deficit-reduction commissions as well as many liberal and conservative economists.

The main Consumer Price Index, the one used to adjust tax brackets and benefits for inflation, is a measure of the average price change of a fixed basket of goods and services purchased by the average urban household; that doesn’t reflect the reality that when, for instance, the price of pork goes up and the price of beef doesn’t, consumers tend to shift from pork to beef. To account for this, and to better track the actual changes in the cost of living, the Bureau of Labor Statistics has been publishing the so-called chained CPI since 2002. The chained CPI generally increases more slowly than the main CPI measure.

To be sure, it’s complicated stuff. But it’s seen as a central way of reducing the deficit because it simultaneously cuts spending growth and increases tax revenues. And many also like it because much of its impact doesn’t come from “cuts” in spending. Rather, it would reduce the “growth” of spending pegged to inflation. And it would affect the way tax brackets and deductions adjust for inflation, so it could appear less like a tax increase than simply raising tax rates.

Spread across the entire budget, chained CPI is a big money maker. Reducing the deficit by roughly $300 billion over 10 years would make it one of the most vital components to any deal that aims to reduce the deficit by $2 trillion to $4 trillion over that span.

The biggest savings—an estimated $112 billion—would be from slowing the growth in the cost-of-living adjustments for Social Security beneficiaries. Another $33 billion would be saved by reducing cost-of-living adjustments for other federal programs. The Moment of Truth Project estimated that a chained CPI “would cause tax-bracket thresholds and other parameters to grow more slowly and raise an extra $87 billion” in revenue over 10 years.

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